Question 1

If global warming began to cause random world-wide damage to crops, insurance companies

Accepted Answer

A) would insure against specific crop failures. 
B) would not insure against specific crop failures. 
C) would be indifferent between insuring or not. 
D) would find themselves facing prosecution for ignoring the problem for so long. 
A) would insure against specific crop failures. 
B) would not insure against specific crop failures. 
C) would be indifferent between insuring or not. 
D) would find themselves facing prosecution for ignoring the problem for so long.

Question 2

The key economic difference between expected utility and expected value is that

Accepted Answer

A) expected value only considers the value of outcomes, whereas expected utility considers the tradeoff between value and risk. 
B) expected utility only considers the value of outcomes, whereas expected value considers the tradeoff between value and risk. 
C) expected utility is the maximum value obtained, whereas expect value is the mean of the values from a set of possible outcomes. 
D) None of the above-the differences are mathematical not economic. 
A) expected value only considers the value of outcomes, whereas expected utility considers the tradeoff between value and risk. 
B) expected utility only considers the value of outcomes, whereas expected value considers the tradeoff between value and risk. 
C) expected utility is the maximum value obtained, whereas expect value is the mean of the values from a set of possible outcomes. 
D) None of the above-the differences are mathematical not economic.

Question 3

Catherine is risk-averse. When faced with a choice between a gamble and a certain level of wealth she will

Accepted Answer

A) always prefer the gamble. 
B) always prefer the certain level of wealth. 
C) prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth. 
D) prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth. 
A) always prefer the gamble. 
B) always prefer the certain level of wealth. 
C) prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth. 
D) prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth.

Question 4

Someone who is risk-preferring has

Accepted Answer

A) diminishing marginal utility of wealth. 
B) constant marginal utility of wealth. 
C) increasing marginal utility of wealth. 
D) less marginal utility of wealth than someone who is risk-preferring. 
A) diminishing marginal utility of wealth. 
B) constant marginal utility of wealth. 
C) increasing marginal utility of wealth. 
D) less marginal utility of wealth than someone who is risk-preferring.

Question 5

You draw colored balls out of a bag. You draw a red ball 30% of the time and a blue ball 70% of the time. For each draw, the blue outcome and the red outcome are

Accepted Answer

A) mutually exclusive. 
B) exhaustive. 
C) Both A and B. 
D) None of the above. 
A) mutually exclusive. 
B) exhaustive. 
C) Both A and B. 
D) None of the above.

Question 6

Which of the following losses to an individual would an insurance company NOT cover?

Accepted Answer

A) The person's automobile is stolen. 
B) Fire destroys the person's home. 
C) The person's father dies. 
D) The person's country is invaded. 
A) The person's automobile is stolen. 
B) Fire destroys the person's home. 
C) The person's father dies. 
D) The person's country is invaded.

Question 7

The ability of diversification to reduce risk

Accepted Answer

A) is greater the more negatively correlated the two events are. 
B) is greater the more positively correlated the two events are. 
C) is greater the more uncorrelated the two events are. 
D) is greater the more risk averse the individual is. 
A) is greater the more negatively correlated the two events are. 
B) is greater the more positively correlated the two events are. 
C) is greater the more uncorrelated the two events are. 
D) is greater the more risk averse the individual is.

Question 8

If a person willingly plays an unfair game that is NOT in his favor, he is risk loving.

Accepted Answer

A) True 
 B)False

Question 9

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away. Why might this be the case?

Accepted Answer

A) The weather in a single geographic area represents idiosyncratic risk, which is diversifiable. 
B) The weather in a single geographic area represents systematic risk, which is not diversifiable. 
C) The weather in far-flung geographic areas represents systematic risk, which is not diversifiable. 
D) The weather in far-flung geographic areas are commonly positively correlated. 
A) The weather in a single geographic area represents idiosyncratic risk, which is diversifiable. 
B) The weather in a single geographic area represents systematic risk, which is not diversifiable. 
C) The weather in far-flung geographic areas represents systematic risk, which is not diversifiable. 
D) The weather in far-flung geographic areas are commonly positively correlated.

Question 10

If an event is unlikely to occur, which probability is a reasonable estimate?

Accepted Answer

A) 0 
B) 0.23 
C) 0.82 
D) Not enough information to determine. 
A) 0 
B) 0.23 
C) 0.82 
D) Not enough information to determine.

Question 11

Which of the following games involving the roll of a single die is a fair bet?

Accepted Answer

A) Bet $1 and receive $1 if 3 or 4 comes up. 
B) Bet $1 and receive $1 if 3, 4, or 5 comes up. 
C) Bet $1 and receive $4 if 6 comes up. 
D) None of the bets is a fair bet. 
A) Bet $1 and receive $1 if 3 or 4 comes up. 
B) Bet $1 and receive $1 if 3, 4, or 5 comes up. 
C) Bet $1 and receive $4 if 6 comes up. 
D) None of the bets is a fair bet.

Question 12

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is NOT

Accepted Answer

A) risk preferring. 
B) risk neutral. 
C) risk averse. 
D) rational. 
A) risk preferring. 
B) risk neutral. 
C) risk averse. 
D) rational.

Question 13

If an event will NOT occur, it has a probability (pr)of

Accepted Answer

A) 0. 
B) 0 < pr < 1. 
C) 1. 
D) Not enough information to determine. 
A) 0. 
B) 0 < pr < 1. 
C) 1. 
D) Not enough information to determine.

Question 14

A fair bet is one where

Accepted Answer

A) the player has a 50/50 chance of winning. 
B) the player's utility function is convex. 
C) the expected value is zero. 
D) the expected value is positive. 
A) the player has a 50/50 chance of winning. 
B) the player's utility function is convex. 
C) the expected value is zero. 
D) the expected value is positive.

Question 15

If a person is risk neutral, then she

Accepted Answer

A) is indifferent about taking a fair bet. 
B) will pay a premium to avoid a fair bet. 
C) has a horizontal utility function. 
D) has zero marginal utility of wealth. 
A) is indifferent about taking a fair bet. 
B) will pay a premium to avoid a fair bet. 
C) has a horizontal utility function. 
D) has zero marginal utility of wealth.

Question 16

If Stock A and Stock B both decrease in value at the same time, they are

Accepted Answer

A) negatively correlated. 
B) uncorrelated. 
C) positively correlated. 
D) bad bets. 
A) negatively correlated. 
B) uncorrelated. 
C) positively correlated. 
D) bad bets.

Question 17

Explain why insurance companies usually do NOT offer earthquake insurance.

Accepted Answer

Insurance companies diversify their risk

Question 18

One aspect of prospect theory is that people tend to

Accepted Answer

A) be very risk averse to large gains. 
B) be very risk averse to losses. 
C) love losses more than gains. 
D) hate gains regardless of potential losses. 
A) be very risk averse to large gains. 
B) be very risk averse to losses. 
C) love losses more than gains. 
D) hate gains regardless of potential losses.

Question 19

According to the reflection effect

Accepted Answer

A) people think harder about losses than about gains. 
B) people become more risk preferring over time. 
C) attitudes toward risk are reversed for gains versus loses. 
D) subjective probabilities on riskier outcomes are weighted heavier than on less risky outcomes. 
A) people think harder about losses than about gains. 
B) people become more risk preferring over time. 
C) attitudes toward risk are reversed for gains versus loses. 
D) subjective probabilities on riskier outcomes are weighted heavier than on less risky outcomes.

Question 20

The certainty effect shows that

Accepted Answer

A) people are overconfident about their choices. 
B) people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is lower. 
C) people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is higher. 
D) people prefer certain outcomes to uncertain outcomes even when the expected values are the same. 
A) people are overconfident about their choices. 
B) people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is lower. 
C) people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is higher. 
D) people prefer certain outcomes to uncertain outcomes even when the expected values are the same.

If global warming began to cause random world-wide damage to crops, insurance companies

The key economic difference between expected utility and expected value is that

Catherine is risk-averse. When faced with a choice between a gamble and a certain level of wealth she will

Someone who is risk-preferring has

You draw colored balls out of a bag. You draw a red ball 30% of the time and a blue ball 70% of the time. For each draw, the blue outcome and the red outcome are

Which of the following losses to an individual would an insurance company NOT cover?

The ability of diversification to reduce risk

If a person willingly plays an unfair game that is NOT in his favor, he is risk loving.

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away. Why might this be the case?

If an event is unlikely to occur, which probability is a reasonable estimate?

Which of the following games involving the roll of a single die is a fair bet?

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is NOT

If an event will NOT occur, it has a probability (pr)of

A fair bet is one where

If a person is risk neutral, then she

If Stock A and Stock B both decrease in value at the same time, they are

Explain why insurance companies usually do NOT offer earthquake insurance.

One aspect of prospect theory is that people tend to

According to the reflection effect

The certainty effect shows that

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Asymmetric Information

Government and Business

Global Business

Filters

Exam 14: Managerial Decision-Making Under Uncertainty

If global warming began to cause random world-wide damage to crops, insurance companies

The key economic difference between expected utility and expected value is that

Catherine is risk-averse. When faced with a choice between a gamble and a certain level of wealth she will

Someone who is risk-preferring has

You draw colored balls out of a bag. You draw a red ball 30% of the time and a blue ball 70% of the time. For each draw, the blue outcome and the red outcome are

Which of the following losses to an individual would an insurance company NOT cover?

The ability of diversification to reduce risk

If a person willingly plays an unfair game that is NOT in his favor, he is risk loving.

Farmers who purchase insurance against crop failures tend to be pooled with farmers far away. Why might this be the case?

If an event is unlikely to occur, which probability is a reasonable estimate?

Which of the following games involving the roll of a single die is a fair bet?

Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is NOT

If an event will NOT occur, it has a probability (pr)of

A fair bet is one where

If a person is risk neutral, then she

If Stock A and Stock B both decrease in value at the same time, they are

Explain why insurance companies usually do NOT offer earthquake insurance.

One aspect of prospect theory is that people tend to

According to the reflection effect

The certainty effect shows that

Introduction

Supply and Demand

Empirical Methods for Demand Analysis

Consumer Choice

Production

Costs

Firm Organization and Market Structure

Competitive Firms and Markets

Monopoly

Pricing With Market Power

Oligopoly and Monopolistic Competition

Game Theory and Business Strategy

Strategies Over Time

Asymmetric Information

Government and Business

Global Business

Filters